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Thursday, January 26, 2017

Daily update 1/26 The infamous sideline money

SPX hits 2300.  Now what.

It was yet another day of early morning high and afternoon low.  Not good.  Breadth was slightly negative.  New highs were down some to 259.  Not enough break out players today to push the market higher.  In fact I heard some comments about a lack of enthusiasm here.  That sounds like an exhausted market doesn't it?  I guess we will see what happens.

The green count turned down quite a bit today.  Not exactly inspiring.

Today was a pretty common top looking bar.  Not exactly what bulls want to see after breaking out of a trading range.  This break out looks at risk for a failure so we need to watch it closely.  Some people think I am a perma bear.  I can understand where that comes from, but it isn't really true.  What I am is paranoid.  I have never talked about why I am like that.  Many years ago I wrote a little about my experience with at IBM. 

"My brain has a way of putting seemingly unrelated facts together to arrive at conclusions others do not.  A coworker of mine was working on a problem where the software would blow up every few days.  The problem was on a system in France and he had set up the debugger so when it blew up he could look at it.  He worked on the problem for several weeks.  He finally asked me for help.  I looked over his shoulder at what was blowing up.  I spent a couple of hours thinking about it and out of the blue it came to me it was a multi-threaded problem.  There was a teeny tiny time window where two different parts of a program might access the same piece of data and make a change that caused a problem for the other.  The window was so small that the application could run for days or even a week before it happened.  He was pretty skeptical, but he changed the code and locked the data so it could not happen and the problem never occurred again.  When he asked me how I figured that out I had absolutely no idea.  It just popped in to my head."

Sometimes I get what I call nagging feelings.  They don't always come to pass, but over the years a lot of them have.  Sometimes I can figure out why I think a certain way and sometimes I can't.  Ever since this bull market started I have had this nagging feeling that it would end without much warning.  I have been paranoid that the market would start what looks like a normal pullback and just keep on going trapping everybody that is long along the way.   I don't know that I can explain exactly why I have this feeling.  Part of it might be the expectation that the real trouble that causes the next bear market is likely to originate overseas.  Maybe I worry for nothing.  Time will tell.  I just wanted everybody to understand why I obsess over figuring out the bull market top.  I am convinced the next bear market is not going to be a pleasant experience. 

This chart is a pretty good representation of the so called sideline money.  It is a ratio of bear and money market funds divided by bull fund assets.

At the end of last year this ratio got the lowest it has been since 2000.  We can see that 2015 showed a period with this indicator below .20.  That began the long trading range.  The only other period where this ratio was below .20 was 2000.  Here is that chart.

In the history of this data this is only the third time below .20.  The other two times lead to a bear market and a trading range lasting over a year.  Obviously the sample size is small.  However, I think the logic behind the ratio is sound.  I recently showed a chart showing all the short covering that has happened since the election.  This ratio shows sideline money at historical low levels.  The fuel to push this market significantly higher is absent at the moment.  I am on record saying this recent move to new highs looks like a blow off top.  I still believe that could be true.  I suspect the result of this extreme low reading of sideline money will end up being a bear market as opposed to another prolonged trading range.  Time will tell.

Interestingly this ratio did not give a warning at the 2007 top.  In fact it spent that bull market at generally higher levels then the current bull market.  I would say that bull market was much more "hated" then this one despite what the Wall Street pundits say.  I am sure that was largely because the major indexes were not at new all time highs though. 


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